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Quarterly Commentary

August 2023

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August 15, 2023

To the friends and clients of the Harvey Investment Company:

Propelled higher by the fervor over advancements in artificial intelligence (AI), the S&P 500 recorded outstanding gains in the first half of 2023.  The index was up 16.9% for the six months ended June 30.  The Federal Reserve continued to push short term interest rates higher, while interest rates on longer maturities were steady.

Much has been made of the narrowness of the advance in stocks in the first six months of the year.  Indeed, the result was stunning.  To get a sense of the concentrated performance, Apple rose 50% and Microsoft rose 43% and at quarter’s end they accounted for 14.5% of the entire S&P 500 Index. The two contributed nearly 1/3 of the 500 Stock index’s gain.  Nvidia, a producer of specialized semiconductor chips that power AI, almost tripled and was another meaningful contributor to the S&P’s sharp advance this year.  It joined the trillion- dollar market-cap club which includes such favorites as Apple, Amazon, Alphabet, and Tesla.   In July, good fortune finally arrived for investors left out of the AI fueled bull market as the rally broadened across many industries.  Evidence mounted that the Fed might just pull off cooling the economy without an accompanying deep recession.   

The myopic focus on AI developments brings into sharp relief a fundamental question every serious investor must confront----how much to pay for a future that is yet to unfold?  The answer is a function of what the investor envisions in the years ahead, and an assessment of the probability that vision will unfurl as expected.  This analysis’s credibility is governed by the depth of knowledge the investor possesses about the business at hand.

Charlie Munger once said that Warren Buffett has three boxes--- In, Out, and Too Hard.  Handicapping accurately where AI goes from here may fall in the ‘too hard’ category.  Nevertheless, riding the wave of AI enthusiasm has been a very lucrative trade for those willing to take the plunge.  For sure, AI will contribute in surprising and important ways to future human endeavors.  The race to capture a share in the profits from AI has become frantic and indiscriminate even though the winners will likely emerge over many years.


Two things occur at once in a financial system such as ours.  In public markets, shares of business ownership trade hands.  News constantly streams forth, along with endless interpretation from anointed pundits.  Stocks ascend and descend accordingly, and, as often as not, inexplicably.  Far from the minute-by-minute excitement in the markets, business managers are making strategic decisions, deploying capital, hiring, firing, and, generally, taking actions they hope will enhance their business’s prospects.   True entrepreneurs take similar actions in the early days of their company’s existence.  But their priorities and actions are existential. They make the difference between survival or doom.

Oddly enough, the overwhelming popularity of the Barbie movie brought to consciousness the importance that entrepreneurship has played in the development of our nation’s great wealth. Media coverage of the movie included reflections on the origins of Barbie and the tenacity of its founder, Ruth Handler.   It reminds us that every business, no matter how large it has grown, had a beginning and, inevitably, there was an entrepreneur or team who risked all to make the vision a reality.

The early days of some of America’s best-known businesses and the histories that chronicle those early days make for fascinating reading.  Some favorites of ours include Shoe Dog, the story of Nike, The Everything Store, about Amazon and its founder Jeff Bezos, and a biography, Steve Jobs, whose working life was deeply intertwined with Apple’s development.  Further afield is Junk to Gold, the fascinating story of how Willis Johnson started as a junk dealer and grew Copart Inc. into a $42 billion market cap favorite.  While many of the founders of these enterprises had riches in mind, it appears that money was just a by- product of pursuing each’s particular obsession--- building an unstoppable business.  We recommend these books as reminders of how fortunes are made, and how our stock markets are far removed from what makes businesses tick.  

We hope you are having a great summer and know how much we appreciate your faith in us.  It inspires us every day.



 Samuel C. Harvey